Donald Marron and I agree about what’s wrong with the House climate bill passed last week–just another example of how economists on different sides of the political aisle often share more common ground than any other two people on different sides of the aisle. I’ve complained before about how odd it is to hear politicians who advocate for stronger environmental goals at the same time claiming that they don’t want a policy that actually raises energy prices. (News flash: then the policy wouldn’t actually change incentives, would it?) Donald emphasizes what a supreme waste of money the House-passed bill is. Even if on net it wouldn’t actually cost the government anything, the opportunity cost is huge:

There are many good things the government could do with that kind of money. Perhaps reduce out-of-control deficits? Or pay for expanding health coverage? Or maybe, as many economists have suggested, reduce payroll taxes and corporate income taxes to offset the macroeconomic costs of limiting greenhouse gases?

Choosing among those options would be a worthy policy debate. Except for one thing: the House bill would give away most of the allowances for free. And it spends virtually all the revenue that comes from allowance auctions.

As a result, the budget hawks, health expanders, and pro-growth forces have only crumbs to bargain over. From a budgeteer’s perspective, the House bill is a disaster.

The potential revenues from climate change/carbon policy are one of those actually desirable ways to raise revenue that economists (from both sides of the aisle) like to dream about. That and limiting or eliminating the tax exclusion for employer-provided health care–you know, those ideas that go over really well with politicians and lobbyists… We need these additional sources of revenue, because it’s clear our federal revenue base is insufficient and will remain that way even after the recession is over. I’ll write more on that tomorrow.

3 Responses to “House Climate Bill Gives Too Much Away”

When long term budgets are out of whack as much as they are tax increases should be seen as good news (assuming government services they support are valued). Still, there are very few direct opportunities to improve the quality of life on this planet though tax increases, this is one of them.

This is an opportunity to actually SAVE something. Not simply shuffle paper or electrons from one side of a ledger sheet to another. It is an opportunity to save something fairly important as well, and at what is likely to be the lowest cost still available to society writ large (given current technology–a binding constraint).

Where else can you improve the balance sheet you leave your children, and the air they breathe all at the same time?

That said there is a great opportunity here for economists to educate society on the ills of over compensation. Too few that would support a carbon tax understand that tax increases that reduce carbon and/or other greenhouse gasses should not be spent on more of the same.

We should use the revenue from any new law to make our system of government as sustainable as the earth that law would try to protect.

All true, but (1) the acid rain permits were also mostly given away and (2) that program is delivering the intended environmental benefits. I wouldn’t evaluate this program by how much money it delivers to the Treasury any more than I would evaluate monetary policy by how much money the FED returns to the Treasury. Icing the cake versus the cake, so to speak.

The number one thing you should know about this bill is that the allowances are worth big money: almost $1 trillion over the next decade, according to the Congressional Budget Office, and more in subsequent decades.

There are many good things the government could do with that kind of money. Perhaps reduce out-of-control deficits?… From a budgeteer’s perspective, the House bill is a disaster.

If you didn’t auction the permits, it would represent the largest corporate welfare program that has ever been enacted in the history of the United States.

In particular, all of the evidence suggests that what would occur is the corporate profits would increase by approximately the value of the permits.

So that — whatever that is, $600 billion, $800 billion, whatever the value is, would go in a sense almost directly into corporate profits rather than being available to fund energy efficiency investments and to provide a cushion or some compensation to American households.

That is why the president, I think, has made absolutely the right choice in saying that the permits should be auctioned…

Well, we’ve seen how long that lasted.

I have academic economist friends who kept telling me: “Support Pigovian taxes now on gas, CO2, (whatever). Now! Because Pigovian taxes are soooooo good that even if you throw the revenue from them in the ocean, they are beneficial.”

Having watched federal and state legislatures in action for many years, I told my Ivory Tower friends:

“No, no, no! If only they threw the revenue in the ocean it wouldn’t be so bad. But they will use it to buy votes by doling it out through, oh, maybe the largest corporate welfare program that has ever been enacted in the history of the United States, and the like.

“Then come 2017 or thereabouts (when both Moody’s and S&P project the credit rating of the US will start falling on current policy) and you really need more tax revenue on a serious scale, you’ll find all your ‘good’ Pigovian taxes already wasted on funding such. What taxes are you going to increase then?”

And here we are. (Except that from the behavior of Democrats in the Senate it looks like this bill doesn’t have much chance there, so maybe all is not lost yet.)

The moral here is: do not support tax increases to close the budget deficit unless you know for rock-solid sure the tax increases will be used to close the budget deficit.

Tax increases used to support other kinds of new spending (not to mention pork and corporate welfare like this) only make the overall fiscal situation worse by keeping it on its current unsustainable course while wasting, throwing away, the potential “lowest-cost” tax increases that we have to deal with the fiscal gap in the future, when the time of reckoning comes.

(BTW, CBO said that the businesses creating CO2 that would be hit by the cap would be fully compensated with an amount equal to 15% of the permits’ value.)